Clients often borrow from a 401(k) plan before filing for bankruptcy. As bankruptcy practitioners, we hate to see this happen. Retirement funds are exempt from creditor collection. Our clients often borrow against an exempt asset to pay an ordinary unsecured debt. 401(k) loan repayments can be burdensome. The standard rules that would require a lender to ask whether a borrower can afford loan payments do not apply to 401(k) borrowing. Instead, the limit is usually set by stating the owner of the retirement plan can borrow up to 50% of the total value.

Anyone with experience in the workforce knows that employers will not simply stop deducting 401(k) loan repayments from paychecks. Employers assert that collecting the payments is a duty under Federal law and ensures the integrity of the retirement system. One would think, then, that 401(k) loan repayments would be deducted or otherwise given credit as an expense on the Chapter 7 means test. That conclusion is, unfortunately, incorrect. 401(k) loan payments are not considered mandatory deductions in a Chapter 7 case.

This result is all the more puzzling given that a Chapter 13 debtor is allowed to pay back the 401(k) loan ahead of all creditors. For the number of months that remain in a 401(k) loan repayment plan, the Chapter 13 debtor reduces the Chapter 13 plan payment by the amount of the 401(k) loan payment.

Mansfield Law Corporation recently litigated a case against the County of Ventura testing whether 401(k) loan repayments could be voluntarily stopped by a debtor. The short of it is that they cannot. The docket materials constitute an exploration of how this fact contradicts and undermines the Ninth Circuit case of In re Egebjerg. You can learn more about the case and this issue on our website.

This office believes that In re Egebjerg was wrongly decided and needs to be reconsidered whan an appropriate case presents itself.

eSR: A False Sense of Safety and Competence?

The Problem of Pro Se Filings

There is no doubt that debtors who represent themselves in Chapter 7 and Chapter 13 cases fare worse than those who retain counsel. In the last published Annual Pro Se Report, the Court indicated:

Pro se cases represented nearly a third of the chapter 7 cases that were dismissed. The percentage of attorney-represented chapter 7 cases that were dismissed, on the other hand, was miniscule (Figure 4). For all chapters, pro se cases were dismissed at an even higher rate, approaching almost half of the dismissed cases for the year.

The Central District of California Bankruptcy Court received the most pro se filings in the nation. In 2015, pro se bankruptcy filings in the Central District were double the second-ranked court, the Middle District of Florida. Many commentators (and judges) have indicated that this significant number of filings done without counsel is problematic. Judge Mund, as long ago as 1994, commented that the pro se litigants were taking court time and staff attention that could be better spent on routine court operation. One legal commentator commented, in response, that Judge Mund's comments brought a new perspective to his thinking.

The usual complaint that most people have about pro se litigants is that the litigants themselves suffer—they are not getting as good a service as if they had been represented by a lawyer. What you are providing is really an unusual kind of twist—the whole system is suffering because of the pro se litigants

While bankruptcy attorneys can electronically file cases, pro se debtors, before 2014, could not. Should pro se debtors be able to file cases electronically? Who does this really help? Who does it hurt?

Enter eSR

On March 31, 2014, the Central District of California became the first of three test courts to install the electronic Self-Representation (eSR) software successfully in the live environment. eSR is an online tool intended to help individuals prepare a chapter 7 bankruptcy petition when they have decided to file bankruptcy without an attorney. After exploring the eSR system from a pro se debtor's perspective, I am not convinced it advances the rights of debtors or will assist the Trustees or the Courts. In fact, the availability of what appears to be a simple online filing system may be seen as an endorsement of self-representation. It also encourages debtors to undertake significant legal decisions, as described below,without counsel. The Central District's apparent embrace of pro se filing and self-representation provides a false sense of security to debtor's who are determined to save $1,000 to $2,000 at the risk of their bankruptcy filing.

The United States federal courts ordinarily discourage self-representation. The right to proceed without counsel is certain and clear. Bankruptcy Rule 9010(a) authorizes a debtor to appear pro se. Under most circumstances, it is a constitutional right to proceed in many legal matters without counsel. That doesn't make proceeding pro se a good choice. In the criminal context, a long line of decisions limits that right and prevents those who are subject to great jeopardy from making a foolish decision. While bankruptcy matters are not as fraught with jeopardy as criminal trials, the stakes in bankruptcy are high and the consequences for mistakes are significant.

Because the “dangers and disadvantages of self-representation during trial are so substantial,” a court must make a “searching or formal inquiry” before permitting a waiver of the right to counsel (although no such inquiry is required for the correlative waiver of right to self-representation).

The Federal Judicial Center, in Assistance to Pro Se Litigants in U.S. District Courts (2011), speaks clearly. "Given the complexity of litigation, it seems that the service that would most help pro se litigants is assistance of counsel." I advance the argument that any action by the courts that directly or indirectly appears to approve self-representation is a disservice and leads debtors away from hiring counsel.

The Central District website, despite being replete with information for debtors who want to file without counsel, does nevertheless warn those seeking to file that they should instead seek counsel. The following warning is found on the Central District website.

Bankruptcy has serious long-term financial and legal consequences and hiring a competent attorney is strongly recommended. The Bankruptcy Court is not permitted to provide legal advice. Individuals filing for bankruptcy without an attorney are still responsible for knowing and following all of the legal requirements. Low or no cost legal resources are available in all divisions of the bankruptcy court.

Another warning is found on the US Courts website.

Filing personal bankruptcy under Chapter 7 or Chapter 13 takes careful preparation and understanding of legal issues. Misunderstandings of the law or making mistakes in the process can affect your rights. Court employees and bankruptcy judges are prohibited by law from offering legal advice.

Much more could be done to steer debtors away from seeking to "go it alone". As Judge Mund indicated in 1994, encouraging or allowing pro se filings is expensive in time and money for the entire judicial system. It leads to much higher rates of dismissal. Finally, I would argue, allowing or encouraging self-representation leads to mistakes that hurt those seeking a fresh start through bankruptcy.

How Does eSR Perform?

A PDF of a selection of the screens presented to a pro se debtor filling out the Petition using eSR is found at this link. The system appears to be a user-friendly web-based data entry system. Some of the fields are dependent on others. That is, responsive fields further in the questionnaire are presented only in response to certain earlier answers. There are at least two areas where the average debtor, despite links to further information, would be at a serious disadvantage or a complete loss.

The first occurs on the screen labeled "Schedule C - Property Claimed as Exempt." The pro se debtor is expected to enter the statutory citation for each exemption claimed. This means that the debtor would need access to a description of the exemptions, information on how to select exemptions, and the ability to calculate the right amount of each item of property to exempt. The only help provided is found through links to the underlying statutes.

The next area of difficulty is likely to be the means test. No direct guidance is provided on the figures a debtor is to use in the means test. Instead, the eSR system links to the Department of Justice website which links to various census data tables and other national standards. Many practitioners struggle with certain aspects of the means test. Expecting a pro se debtor to complete the means test without any software that calculates totals, multiplies or adds various fields, carries forward secured debt, and requires the debtor to input national standards is idealistic or unrealistic.

One aspect of eSR filing is quite different from that done by attorneys. The forms that attorneys ordinarily scan and file must be delivered to the appropriate court. Payment is also dropped off by the debtor in person at the courthouse.

The following forms with original signatures must be delivered or mailed to the Bankruptcy Court after submitting your petition electronically: Statement About Your Social Security Numbers (Form 121), Declaration Regarding Electronic Filing, Notice of Available Chapters (Form B201), Statement of Related Cases (LBR Form F1015-2.1), Declaration About an Individual Debtor’s Schedules (Form 106Dec), Declaration by Debtor(s) as to Whether Income was Received From an Employer within 60 Days of the Petition Date (LBR form F1002.1), Verification of Master Mailing List of Creditors (LBR form F1007-1), Bankruptcy Petition Preparer’s Notice, Declaration and Signature (Form 119), if applicable, Disclosure of Compensation of Bankruptcy Petition Preparer (Form B2800), if applicable, and any other documents/attachments required to file your bankruptcy case.

Those filing for bankruptcy protection need to be encouraged to obtain competent and reasonably priced consumer bankruptcy counsel. Most of our clients would qualify for hardship, reduced fees, or even pro bono representation if they were seeking representation in a field other than bankruptcy. But consumer bankruptcy attorneys serve precisely the population that can least afford representation. Despite this fact, hiring a bankruptcy attorney is ordinarily one of the least expensive forms of legal representation with the greatest result for the funds expended.

I would hope the courts and the consumer bankruptcy bar would be united in strongly encouraging debtors to obtain counsel rather than facilitating options that communicate to debtors that competent bankruptcy counsel is, at best, optional.

MyFico.com provides information on the various codes you may find on your credit report associated with inquiries.

PRM - Inquiries with this prefix indicate that only your name and address were given to a credit grantor so they can provide you a firm offer of credit or insurance.(PRM inquiries remain for 12 months.)

AM or AR - Inquiries with these prefixes indicate a periodic review of your credit history by one of your creditors.(AM and AR inquiries remain for 12 months.)

PR - Inquiries with this prefix indicate that a creditor reviewed your account as part of a portfolio they are purchasing.(PR inquiries remain for 12 months.)

Equifax or EFX - Inquiries with these prefixes indicate Equifax's activity in response to your contact with us for a copy of your credit file or a research request.

ND - Inquiries with this prefix are general inquiries that do not display to credit grantors. (ND inquiries remain for 24 months.)

ND MR - Inquiries with this prefix indicate the reissue of a mortgage credit file containing information from your Equifax credit file to another company in connection with a mortgage loan. (ND inquiries remain for 24 months.)

The following summary of a case concerning the discharge of ongoing HOA fees was taken from the website for BestCase software and was written by George Basharis, JD.

Bankruptcy Chat: Ongoing Association Fees Dischargeable

by George Basharis J.D.

Chapter 13 debtors’ plan that did not provide for the payment of ongoing condominium assessments could be confirmed over the objection of the homeowners association. The obligation to pay future assessments arises prepetition and, therefore, the obligation, although contingent and not yet matured, is a dischargeable “debt” within the meaning of Bankruptcy Code Sec. 1328(a).

The debtors abandoned their condominium and stopped paying association assessments almost two years before filing for bankruptcy. Wishing to avoid personal liability for ongoing assessments, the debtors’ proposed plan provided for the transfer of title in the condominium to the bank holding a first mortgage on the property.

The bank and the homeowners association objected to confirmation of the debtors’ plan. The bankruptcy court sustained the bank’s objection as to the debtors’ proposed forced transfer of title through the Chapter 13 plan because, under applicable state law, a transferee of property must accept the transfer and the bank was not willing to accept the proposed transfer.

Personal Liability

However, the debtors did not have to divest themselves of title to avoid personal liability for future assessments. The bankruptcy court identified a split among courts regarding the dischargeability of ongoing association assessments under Sec. 1328(a). Some courts assert that assessments arise under covenants that run with the land and conclude that ongoing assessments are not dischargeable. Other courts view assessments as arising under a contractual agreement between the parties. Under the latter view, adopted by the bankruptcy court in this case, ongoing assessments are a “debt” as contemplated by the discharge provision under Sec. 1328(a).

Characterization of Future Assessments

The term “debt” is defined by the Bankruptcy Code as a “liability on a claim,” and the term “claim” is defined very broadly as a “right to payment.” Using the Code’s broad characterizations of “debt” and “claim,” the bankruptcy court observed that the debtors’ prepetition act of taking title to the condominium gave rise to the homeowners association’s claim for assessments, including a contingent and unmatured claim for future assessments.

The bankruptcy court also noted that the characterization of ongoing assessments as a “debt” was supported by Sec. 523(a), which provides that certain debts, including debts for ongoing association assessments, are not dischargeable under Chapters 7, 11, 12, or Chapter13 if the debtor receives a hardship discharge under Sec. 1328(b). By including ongoing assessments on the list of debts in Sec. 523(a), Congress identified those obligations as “debts” and as a corollary identified them as dischargeable absent a specific exception.

Moreover, the bankruptcy court rejected the homeowners association’s argument that future assessments are not dischargeable because they arise postpetition. Not only did the debtors’ obligation to pay ongoing assessments arise prepetition when the debtors took title to the condominium, the association’s argument would render Sec. 523(a)(16), which provides for the nondischargeability of ongoing assessments unless the debtor receives a discharge under Sec. 1328(a), meaningless because postpetition debts generally are not subject to discharge. Moreover, the court observed that allowing for the discharge of ongoing assessments is consistent with Congress’ policy that Chapter 13 should provide broader relief than other chapters of the Bankruptcy Code.

A Debtor in Possession ("DIP") may sell estate property free and clear of third party interests, such as liens, claims, and encumbrances. Authority is found in 11 USC 363(f). A sale free and clear of third party interests is authorized if one of the following conditions is found:

A sale of the property free and clear of the interest is authorized by nonbankruptcy law;

The third party affected consents;

The affected interest is a lien and the sale price of the property is greater than the aggregate value of all liens on the property;

The affected interest is in bona fide dispute; or

The Third party whose interest will be affected could be be compelled in law or equity to accept a money satisfaction.

To qualify under item 3, above, several courts in the Ninth Circuit have held that the sales price must be greater than the aggregate amount of the debts encumbering the property so there will be some equity for the estate. This may give leverage to junior lienholders to receive compensation from senior lienholders to let the sale go through.

Most importantly, property may be sold free and clear of nondebtor's interest that is in bona fide dispute. The bankruptcy court need only determine that a dispute exists. In re Gerwer (9th Cir. 1990), 898 F.2d 730, 733. 11 USC 363(f)(4).

The authority to sell free and clear is, of course, subject to adequate protection. Courts typically order that the affects nondebtor interests attach to the sale proceeds.

Don't forget that any secured creditor can "credit bid" at a sale. This means that the secured creditor can offer a bid in the amount of the lien.

Sale orders involving Chapter 11 debtors in the Central District must include a provision requiring a certified copy of the escrow closing statement to be submitted to the U.S. Trustee within 10 days after the close of escrow or completion of the sale.

Mansfield Cheney, PC is here to help Chapter 11 debtors through the sale of assets.

The DIP must articulate a business justification for selling estate property out of the ordinary course of business. Estate property may be sold through a confirmed plan, by public auction, or by private sale. Most DIPs negotiate a sale of estate assets with a specific buyer, subject to overbidding by other parties at the court hearing on the sale.

The DIP should obtain court approval of the overbid and sale procedures before noticing the sale hearing. Not doing so may make the sale vulnerable to objections at the hearing. This can result in a delay of the hearing.

A hearing on a Motion to Establish Procedures for the Sale of the Estate's Assets may be scheduled on not less than 7 days notice (without an order shortening time).

Notice must describe the proposed bidding procedures and include a copy of the proposed purchase agreement. The notice must describe the marketing efforts undertaken.

The notice must provide that opposition is due on or before 1 day prior to the hearing.

The moving party must serve the motion and notice of the motion and hearing by personal delivery, messenger, telephone, fax, or email.

A date and time for a hearing on the motion to approve the sale itself may be obtained at or prior to the hearing on the Sale Procedure Motion. The hearing must be scheduled no more than 30 days following.

If a break-up fee is requested for the purchaser, evidence must show:

The fee is likely to enhance the ultimate sale price; and,

The fee is reasonable.

If the seller has been contacted by parties who may overbid, the Motion for Order Authorizing Sale must be set for hearing pursuant to LBR 9013-1(a).

The moving party must submit a declaration establishing the value of the property and that the terms and conditions of the proposed sale, including the price and all contingencies, are in the best interest of the estate. A memorandum of points and authorities need not necessarily be filed.

The Notice of Hearing must include a description of the property and the terms and conditions of the proposed sale. This includes price and all contingencies. The Notice of Hearing must declare that the sale is or is not free of all liens, claims, or interests, and describe those liens, claims, or interests. It must also state that the seller is accepting higher bids. The Notice must include a description of the commission to be paid, the identity of the broker, and possible tax consequences to the estate.

Don't forget to use Form 6004-2.NOTICE.SALE, which must be completed and submitted to the clerk at the time of filing for purposes of publication by the clerk on the court's website.

Unless the court order otherwise, a Debtor in Possession ("DIP") in a Chapter 11 case may use, sell, or lease property of the bankruptcy estate in the "ordinary course of business" without court approval. The DIP has automatic statutory authority to run the business in Chapter 11 unless the court orders otherwise.

The Ordinary Course of Business

The question is, "what is the ordinary course of business?"

Courts often apply a two-part test. The first part, call the "horizonal" dimension, looks at whether the proposed DIP transaction is typical industry-wide in other similar businesses. The second part, called the "vertical dimension," considers whether transaction subjects creditors to risks different from those undertaken by the business at the time the creditor extended credit. One might ask, "is this a new activity for this particular business?"

There are, of course, limitations on the DIP use of estate property. When the property that is going to be used is subject to liens or co-ownership, "adequate protection" might be necessary. Further, the use of cash collateral, defined as cash or cash equivalents in which a third party has a security interest, always requires creditor consent or authorization after notice and hearing.

But what if the proposed sale or use is not in the ordinary course of business? Then, the DIP must first give notice to creditors and parties in interest of the intended use, sale or lease outside the ordinary course of business. The DIP must show reasonable business judgment to obtain court approval. Selling property of the estate, apart from sales of inventory, is ordinarily not in the usual course of business.

Adequate Protection

When property of the estate subject to a security interest is used or sold, upon request of the creditor, adequate protection must be paid by the DIP. Adequate protection may include cash payments, additional or replacement liens, or other relief that provides "indubitable equivalent" of the creditor's interest in the property. Cash payments can be made periodically to equal the decrease in value from the use or the passage of time. An equity cushion in property may also provide adequate protection to a secured creditor.

Always consult an attorney if you face a Chapter 11 case as a creditor. Mansfield Cheney, PC is available to assist in complex Chapter 11 matters. Call us at 805-642-6406 or visit us on the web at http://www.hcmlawfirm.com.

The average debt load per student loan borrower is now $24,301. 37 million people live with student loans. 15% of student loans apparently are from private banks and lenders. Three Senators have now introduced legislation to make private student loan debt dischargeable in bankruptcy. The bill below undoes a change in law from 2005 making private student loan debt nondischargeable

Durbin, Harkin, Franken and others say it's time to restore transparency, fairness and common sense to student loan process

[WASHINGTON, D.C.] – U.S. Senator Dick Durbin (D-IL) joined Chairman of the Senate Health, Education, Labor and Pensions Committee U.S. Senator Tom Harkin (D-IA) and U.S. Senator Al Franken (D-MN) in reintroducing two pieces of legislation – the Fairness for Struggling Students Act of 2013 and the Know Before You Owe Act of 2013 – to restore transparency, fairness and common sense to the student loan process.

According to the Consumer Financial Protection Bureau, the student loan debt among college students surpassed $1 trillion last year. This reflects an average debt load of $24,301 for each of the 37 million student borrowers in the United States, according to the New York Federal Reserve Bank. The CFPB reports that approximately $150 billion of outstanding student loan debt is in private loans.

“The first two pieces of legislation I will introduce this Congress deal with what I think is one of the biggest threats to millions of working families – the growing student loan debt crisis,” said Durbin. “Too many Americans are carrying around mortgage-sized student loan debt that forces them to put off major life decisions like buying a home or starting a family. It’s not only young people facing this crisis, it is parents, siblings and even grandparents who co-signed private loans long ago and are still making payments decades later. It’s time for action. We can no longer sit by while this student debt bomb keeps ticking.”

“Unless we take action to educate and protect borrowers, student loan debt will be the next mortgage crisis. Young Americans are being hamstrung by record debt levels, forcing them to delay other important investments in their futures, including purchasing homes and saving for a secure retirement. By empowering students with clear guidance about their federal financial aid options before they turn to more expensive private loans and restoring the option to discharge private loan debt through bankruptcy, the Know Before You Owe Act and the Fairness for Struggling Students Act will go a long way to help students make smart choices and provide relief to borrowers. Students need to know how to avoid the higher interest rates and less favorable terms of private loans, so they can be on more stable financial footing when they graduate,” Harkin said.

“Mounting student loan debt not only saps the ability of students in Minnesota and across the country to prosper after they graduate, but it is now becoming a real threat to our country's economic well-being,” said Sen. Franken, a member of the Senate Education Committee. “The average Minnesota student now graduates from college with more than $25,000 in debt, and large repayment costs for many years afterward stop them from being able to purchase homes, cars or other goods which fuel our economy. That is why I’ve been pushing for commonsense reforms to the student loan process since I joined the Senate. The cost of a college education shouldn’t bankrupt a family. As our economy continues to recover, this legislation will help protect our students.”

The Fairness for Struggling Students Act of 2013 – also cosponsored by U.S. Senators Sheldon Whitehouse (D-RI) and Jack Reed (D-IL) – aims to restore fairness in student lending by treating privately issued student loans in bankruptcy the same as other types of private debt. Since 1978, government issued or guaranteed student loans have been treated as nondischargeable during bankruptcy in order to safeguard federal investments in higher education. In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections. Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005 so that privately issued student loans will once again be dischargeable in bankruptcy like nearly all other forms of private debt.

“A basic principle of our country is a fresh start for those who get in over their heads with debt, if they’re willing to face the rigors of bankruptcy,” said Senator Whitehouse. “Even this is denied for those drowning in private student loans, as the result of a provision snuck into the 2005 bankruptcy reform legislation in the dead of night. This bill gives us the chance to right that wrong.”

“Private student loans should be treated the same as other private debt in bankruptcy proceedings. This legislation would restore limited bankruptcy protection and send an important message to lenders and students that they need to be responsible,” said Senator Jack Reed. “Getting a higher education is essential today and I will continue working to help make college more affordable. This bill will give student borrowers who are struggling more options to meet their financial obligations and get back on their feet.”

The Know Before You Owe Act of 2013 would require schools to counsel students before they sign on to expensive, even unnecessary, private student loan debt and inform them if they have any untapped federal student aid eligibility. It would also require the prospective borrower’s school to confirm the student’s enrollment status, cost of attendance and estimated federal financial aid assistance before the private student loan is approved.

There are several stark differences between private student loans and federal student loans. Federal student loans have fixed interest rates and offer an array of consumer protections and favorable terms, including deferment and forbearance in times of economic hardship, as well as manageable repayment options, such as the Income-Based Repayment and Public Service Loan Forgiveness programs.

In contrast, private student loans involve only private profit and often resemble credit cards rather than financial aid with uncapped variable interest rates (which spiked as high as 18% in recent years), hefty origination fees and few, if any, consumer protections. Private student loans are ineligible for federal forgiveness, cancellation or repayment programs.

There are very few types of debts that the bankruptcy law subjects to a different standard, allowing for discharge in only the most extreme circumstances. For example, the bankruptcy code makes it especially difficult for people to discharge child support responsibilities, overdue taxes, and criminal fines. Privately issued student loans should not be on that list.

805-642-6406

MANSFIELD LAW CORPORATION is a debt relief agency pursuant to 11 U.S.C. 528(a)(4) and assists individuals, families, and businesses file for bankruptcy relief under the Bankruptcy Code. This website is a communication under California Rule of Professional Conduct 1-400. No legal relationship is created by the use of this website and no legal advice is provided. No guarantee or warranty is provided that your case or matter will achieve any particular result and testimonials and endorsements provided on this site do not constitute a guarantee, warranty, or prediction about your matter or case. This communication is made on behalf of MANSFIELD LAW CORPORATION and ANDREW S. MANSFIELD, State Bar No. 174556 is responsible for its contents. All information contained on this website may be factually substantiated by a credible source, including data from the United States Public Access to Court Electronic Records (PACER) system. Detailed data and information is available on request. Andrew S. Mansfield is certified by the State Bar of California Board of Legal Specialization in bankruptcy law. For more information on bankruptcy law and Christian and Jewish tradition and scripture, see the unaffiliated website at bankruptcyandchristianity.com.